Asset Allocation : Groupama AM is maintaining its preference for risk assets
By Gaëlle Malléjac, Active Management Investment Director
Looking at the fundamentals, the market environment is generally positive, especially since the political risk in Europe has been almost totally extinguished.
In terms of asset allocation, Groupama Asset Management is maintaining a selective approach, with a preference for risk assets.
The indicators of global economic growth remain favourable, underpinned by an all-round simultaneous recovery of business activity and by the movement of inflation, which is trending upward but without excess. “The recovery of activity is not only homogeneous and simultaneous across all geographical zones and economic sectors but is now also self-sustaining, thanks to investment growth,” observes Gaëlle Malléjac, Active Management Investment Director. On the political plane, uncertainties have been removed after the French elections. ‘And, in our opinion, the other coming elections, such as the German parliamentary elections, do not represent a major risk.”
However, the market consensus is showing increasing prudence with regard to the American economy, given the recent growth and inflation indicators, which were worse than expected.
“The markets are beginning to express doubts about the American economy. There is also scepticism regarding the promises of budget stimulation and pro-growth measures made by Donald Trump at his inauguration. Seven months on, investors can see no change in the status quo,” is the analysis of Gaëlle Malléjac. Meanwhile, the Groupama AM team remains confident regarding the American economic cycle. “The lowering of expectations regarding inflation is linked to the disappointing inflation figures published in spring and the lifelessness of oil prices, which again retreated in the first half-year. However, the weakness of oil today essentially stems from the fact that global oil stocks remain high, and not from any downturn in demand in the economies of the West.
Rates heading up
The Groupama AM team considers that the low levels of the sovereign bond markets during June are disconnected from reality. The doubts concerning the US market and the fall in oil prices have driven the decline in American sovereign rates. “We consider these levels to be too low. One reason is that we do not factor in short to medium-term macroeconomic disappointment. The Fed will start shrinking its balance sheet in autumn, while the ECB’s outlook rules out any deflationary risk. That means that rates will be going up,” argues Gaëlle Malléjac. So, the team at Groupama AM is maintaining its targets at 2.80% for the American 10-year Treasury Note by the end of 2017, 0.9% for the German Bund and 1.25% for the French OAT.
For risk assets, the targets are also unchanged. “Our objective for the CAC 40 remains the same as our predictions published in March. The index should reach 5,500 points by the end of the year, compared to 2,500 for the S&P 500.”. The progress of shares in the first six months of the year was sustained, and the multiples are high. “We are now expecting a continued rise, in line with growth in company profits.”.
In the credit segment, the fundamentals remain robust, as can be seen in the fall in default rates. This asset class is also benefiting from technical factors, with buying from central banks continuing to encourage investment flows, while, for issuers, the demand for credit is not taking place in an environment of low rates. “However, for investors, valuation levels are beginning to become tighter, after a long rally of the fixed income market. We risk seeing a resurgence of prudence after the summer, when the ECB will announce the slowing of its asset purchase programme. Despite very healthy fundamentals, investors will probably start turning to arbitrage and seeking to hedge their portfolios,” predicts Gaëlle Malléjac.
Cross-credit, financial debt and cyclic securities are among the preferred themes
In terms of asset allocation, Groupama AM is maintaining its preference for risk assets, while preserving a high level of diversification. “We remain under-exposed to sovereign debt on both sides of the Atlantic, preferring inflation-indexed bonds (which have attractive valuation rates in the eurozone) and corporate bonds”. On the credit market, we prefer the cross-over segments combining the lowest-rated bonds in the investment universe and the highest-rated bonds in the high-yield universe. “In the high yield segment, we favour B-rated securities with short maturity, because they offer better protection against the upward trend in interest rates,” explains Gaëlle Malléjac. Subordinate financial debts remain attractive, given the rate of return offered, on the condition of picking issues from national banking champions.
Finally, thematic stock-picking is the prevailing rule on the share markets. Cyclic securities tied to investment, especially technological securities, are preferred. “We also remain positive concerning M&A on the one hand, since we consider that target companies and buyers alike may see their stock prices rise on the markets, and concerning the return of inflation on the other hand,”she adds.However, the valuation levels of shares and especially of debt has prompted the Groupama AM team to envisage a slight reduction in the beta coefficient of its portfolios by the end of third quarter.
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